Brian Fallow: Maybe, just maybe, higher wages ahead

The labour market is tight, with more companies reporting that it's tough to find staff. File picture, Northern Advocate

Pay rises barely kept pace with inflation in the year ended September, and then only because of the one-off boost from the pay equity settlement for care and support workers that kicked in on July 1.

The broadest measure of wage inflation, the labour cost index (including both the private and public sectors and including overtime), rose 1.9 per cent for the year, matching the rise in the consumers price index (CPI) over the same period.

Statistics New Zealand reckons that without the legislated increase in wages for 55,000 people working in aged and disability residential care, the increase would have been 1.6 per cent over the year - or a 0.3 per cent decline in real terms.

Another measure of wage growth is the quarterly employment survey's private sector ordinary time series, which recorded an increase of 2 per cent in the latest year. That is a marked improvement on the annual rises of 1.1 or 1.2 per cent in the previous three surveys, but again, Statistics NZ notes that it was boosted by a rise in the healthcare and social assistance industry.

In any case averages, as we know, can mask wide variations. If Bill Gates and Jeff Bezos walk into a bar, the average wealth of the people in the bar will shoot up, but the other patrons don't suddenly become billionaires.

Average hourly earnings, when broken down into 16 industries, ranged from a drop of 1 per cent for the year in the transport, postal and warehousing industry to a rise of 5.3 per cent in the real estate services industry.

The cost of living varies widely as well.

The CPI weights the 600-plus items in its basket according to the spending of the average household.

But, usefully, Statistics NZ also reweights the CPI basket to reflect the average spend of some broad sub-sets of consumers.

For example, for those in the lowest quintile or fifth of households when ranked by income, a drop in international airfares probably does not help much, while food prices or rent would represent a larger share of their outgoings than for the average Kiwi household.

In the year ended September, while the CPI rose 1.9 per cent, the cost of living index for those in the lowest income quintile rose by 2.3 per cent, the highest annual increase for more than three years. For beneficiaries and for superannuitants, the inflation rate was also 2.3 per cent, but for those in the top income quintile it was 1.6 per cent.

That tends to be the pattern: the higher your income, the less inflation you face. Inflation amplifies inequalities in nominal incomes.

Even more so when housing costs are taken into account.

According to the latest household economic survey, one household in eight spends 40 per cent or more of its income on housing costs, which include rents and mortgage payments, rates and building-related insurance. For all households, the average share of spending going on housing costs is 16.4 per cent. In Auckland it is 17.6 per cent, even though the average household income at $121,000 is 24 per cent higher than the national average.

Some of those costs are included in the CPI. Rents were up 2.2 per cent in the latest September year, rates up 3.7 per cent and dwelling insurance up 12 per cent. But mortgage interest costs are not in the CPI.

However the statisticians produce a series, the CPI all groups plus interest, which does include mortgage interest costs. The latest read is 1.5 per cent for the year; it was negative 0.4 per cent a year ago. So that measure of the cost of living has risen faster over the past year than the standard CPI by 0.4 percentage points.

On the face of it, it is odd that we are seeing such sluggish real wage growth when other indicators are pointing to a tight labour market.

This week's labour market data include a drop in the unemployment rate to 4.6 per cent, the lowest since December 2008.

The number of people employed rose 4.2 per cent over the past year, outstripping brisk migration-fuelled growth in the working age population. New Zealand's employment rate is the fourth highest in the OECD.

Labour force participation is at 71.1 per cent, its highest since the household labour force survey began in 1986.

NZIER's quarterly survey of business opinion continues to record historically low readings for the ease of finding labour, and while ANZ's business outlook survey has found employment intentions falling over the past three months, that was from elevated levels and hiring intentions remain well above the 10-year average.

So given these signs of a tight labour market, are there grounds to hope for a pick-up in wages?

Looking ahead, the boost to labour supply from net immigration is expected to fall, while the change of government should presage higher settlements in public sector pay rounds as well as a string of rises in the minimum wage.

There is also the prospect of "fair pay agreements".

While detail is still awaited, Labour has described the object of the exercise as setting a floor to prevent the race to the bottom, where good employers are undercut by some bad employers who reduce labour costs through low wages and poor conditions.

To those factors suggesting a pick-up in wage growth, ANZ senior economist Sharon Zollner adds some tail winds behind this cyclical laggard: the unemployment rate is now well below 5 per cent, the level ANZ economists regard as implying upward pressure on inflation.

"Firms are profitable and say they are having difficulty finding staff and CPI inflation is well off its lows," she says.

"On the other hand, secular forces such as technology displacing labour have not gone away and some measures of labour demand [like job advertisements] have softened."

But even if the jury is split, the majority verdict among the indicators looks like a period of real wage growth.

Which would make a welcome change.